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REIT Q3 Earnings: Key Predictions for ARE, AVB, UDR, VNO

We will now tread into another busy week of the current reporting cycle and real estate investment trust (REIT) will buzz with activity on Monday itself.

Among the factors that influenced the REIT space, a sluggish yet steady macroeconomic improvement is worth mentioning. This led to strong demand for a number of asset categories in third-quarter 2017. Though supply has been increasing, the pace has been modest in many of the asset categories.

Going by numbers, per a study by the commercial real estate services’ firm, CBRE Group Inc. CBG, the U.S. office vacancy rate declined to 12.9% in the third quarter amid growth in office-using jobs. In most of the U.S. office markets, vacancy declined, taking the national office vacancy rate close to its post-recession low.

Moreover, according to a study by the real estate technology and analytics firm — RealPage, Inc. RP — the U.S. apartment market recorded stable rent growth, while occupancy remained healthy in the third quarter. However, these growth levels have moderated from the previous years. For new leases, effective rents inched up 0.9% during the quarter and 2.6% annually. Further, apartment occupancy came in at 95.5% for the third quarter across the nation’s top 100 metros.

However, mall traffic continues to suffer amid rapid shift in customers’ shopping preference through the online channel, resulting in an increasing number of retailers jumping on the dot com bandwagon. These have made retailers reconsider their footprint and eventually opt for store closures in recent times. Further, retailers unable to cope with competition have been filing bankruptcies. This is a pressing concern for retail REITs, as the trend has been considerably curtailing demand for the retail real estate space.

Let us take a look at how the following REITs are placed ahead of their quarterly releases.

Office REIT Alexandria Real Estate Equities, Inc. ARE focuses on Class A properties concentrated in urban campuses, primarily for the life science and technology entities. These locations are characterized by high barriers to entry and exit, and a limited supply of available space. This highly dynamic setting adds to the productivity and efficiency of the tenants, and will enable the company to enjoy steady rental revenues in the third quarter.

However, a substantial development pipeline, currency fluctuations and stiff competition can affect Alexandria’s bottom-line growth in the quarter under review.

Amid these, the Zacks Consensus Estimate for total revenues for the third quarter is currently pegged at $210.9 million. This reflects a decline of 8.5% as compared with the prior-year period. The Zacks Consensus Estimate for funds from operations (FFO) per share for the quarter is $1.50.

Currently, the Earnings ESP for Alexandria is 0.00%. Moreover, it has a Zacks Rank #4 (Sell), which actually reduces the predictive power of ESP. (Read more: What to Expect from Alexandria's Q3 Earnings Report?)

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

For residential REIT AvalonBay Communities, Inc. AVB, there is an increasing apartment supply in a number of its markets. Hence, any robust growth in its stabilized portfolio is likely to remain restricted in the yet-to-be-reported quarter. Further, delay in construction activities in the development portfolio is anticipated to affect the company’s lease-up net operating income in the near term.

Nevertheless, AvalonBay has a solid portfolio of high quality assets in premium locations as well as a healthy balance sheet. Also, increasing consumer confidence on the back of job growth and rising wages augur well for rental demand.

Amid these, the Zacks Consensus Estimate for third-quarter revenues is pegged at $538.5 million, denoting an expected increase of 4.3% year over year. Moreover, the Zacks Consensus Estimate for FFO per share for the quarter is pegged at $2.26.

However, AvalonBay has a Zacks Rank #4 (Sell) and an Earnings ESP of -5.75%. This combination leaves our prediction inconclusive. (Read more: What's in the Offing for AvalonBay in Q3 Earnings?)

On the other hand, residential REIT UDR Inc. UDR boasts vast experience in the residential real estate market. The company has a superior portfolio in targeted U.S. markets and adheres to disciplined capital allocation. These are likely to drive results in the to-be-reported quarter.
Specifically, the company is anticipated to benefit from favorable demographic trends. Along with this, the healthy job market is estimated to drive demand for apartments.

However, we remain apprehensive about UDR Inc.’s performance as it has been dealing with escalating deliveries in a number of its markets. This remains a concern as elevated levels of supply curtail a landlord’s ability to demand higher rents and result in lesser absorption. As such, concession levels are likely to remain at the higher end, while pricing power of the company is expected to remain limited in the quarter.

The Zacks Consensus Estimate for third-quarter revenues of UDR Inc. is pegged at $250.1 million, denoting estimated growth of 2.8% year over year. Moreover, the Zacks Consensus Estimate for FFO per share for the quarter is pegged at 47 cents.

At present, UDR Inc. has a Zacks Rank #3 (Hold) and an Earnings ESP of 0.00%. Though the Zacks Rank is favorable, we also need to have a positive ESP to be confident of an earnings beat. (Read more: What's in the Offing for UDR Inc this Earnings Season?)

Finally, diversified REIT Vornado Realty Trust VNO has been actively repositioning its portfolio. In line with this, the company is involved in opportunistic acquisitions and divestitures, along with business spin-offs. In July, it completed the spin-off of its Washington, DC business. This made Vornado a New York-based office and retail REIT. Though such efforts to streamline business are commendable, the dilutive effects of these moves cannot be ignored.

Subsequently, we anticipate a fall in the company’s total revenues in the to-be-reported quarter. The Zacks Consensus Estimate for total revenues for the third quarter is currently pegged at $527.8 million. This reflects a decline of 16.7% from the prior-year quarter. The Zacks Consensus Estimate for FFO per share is currently pegged at 72 cents.

At present, Vornado has a Zacks Rank #3 and an Earnings ESP of -16.7%. Though the company has a favorable Zacks Rank, the negative ESP lowers chances of an earnings beat. (Read more: What's in the Offing for Vornado This Earnings Season?)

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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RealPage, Inc. (RP): Free Stock Analysis Report
 
CBRE Group, Inc. (CBG): Free Stock Analysis Report
 
AvalonBay Communities, Inc. (AVB): Free Stock Analysis Report
 
United Dominion Realty Trust, Inc. (UDR): Free Stock Analysis Report
 
Vornado Realty Trust (VNO): Free Stock Analysis Report
 
Alexandria Real Estate Equities, Inc. (ARE): Free Stock Analysis Report
 
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